Microsoft’s Xbox gaming revenue for the quarter ending on March 31, was $2.36 billion, up about 5% from the same period last year, driven by Xbox software and service growth of 12%, the company announced Wednesday.

That jump in software and service — primarily due to third-party games and subscription growth — offset hardware sales of Xbox consoles, which dropped by about a third.

The news comes just a week after Microsoft announced a new, cheaper disc-free Xbox console — called the Xbox One S All-Digital — and a bundle that paired the Xbox Live Gold online subscription with Microsoft’s Xbox Game Pass.

The Xbox One S All-Digital will be exactly like the Xbox One S, but without a Blu-ray drive. Instead, the system will only support downloaded content. It will also sell for $50 less than the MSRP for the Xbox One S.

Those announcements reignited the debate over digital downloads versus physical media for video games. The definition and value of “owning” a game have been increasingly in the news over the past year or so.

As a whole, Microsoft announced revenue of $30.6 billion for the quarter, up 14% for the same period last year. In discussing the earnings, Microsoft CEO Satya Nadella called out the importance of Microsoft’s cloud business.

“Leading organizations of every size in every industry trust the Microsoft cloud. We are accelerating our innovation across the cloud and edge so our customers can build the digital capability increasingly required to compete and grow,” he said.

Amy Hood, executive vice president and chief financial officer of Microsoft, said that demand for the company’s cloud offerings drove commercial cloud revenue to $9.6 billion for the quarter, up 41% year-over-year.

“We continue to drive growth in revenue and operating income with consistent execution from our sales teams and partners and targeted strategic investments,” Hood said.